What determines Food Prices (and famines, and revolutions…)?

To analyze the dynamics of food prices is a pretty important – and complex – task. If foods prices are too volatile or too attached to the fluctuations of other goods’ prices, many many people risk to face starvation from day to day. Food prices influence what you can eat, how much and for how long. High prices can benefit producers while literally killing poor families who can’t afford to buy the amount of food they require to survive. Low prices certainly harm producers, by forcing them to cut investments and reduce the output, and can thus end up killing poor families again, this time because there is not enough food supplied (while before there was). Moreover, high prices tend to favor social unrest. History is full of examples of such a disruptive phenomenon, from the Boxer Revolution in the 19th century to the recent Arab Springs. Again, many people die, governments are toppled, safety is compromised, states tend to fail…

Is therefore extremely crucial to understand what’s going on behind food prices fluctuations, and what are the main variables playing behind the scenes. Ultimately, it would be interesting too to determine who are the main actors taking the decisions which influence those variables, i.e. who are the people (consciounsly or unconsciously) responsible for such devastating outcomes. Needless to say, the variables involved are so many that it would be crazy even just to imagine to enumerate all of them in a single document. Here, I will only mention those included in the next graph, namely the most important (or easily recognizable) ones. Obviously, once these main factors are identified, one should then analyse what influences the variables, i.e. the variables of the variables. This would easily become an endless – and useless – game: as economists should acknowledge, reality is far too complex to be explained by a finite model.

Source: BCFN, 2011

Since I want to avoid being pedantic and boring, i will explain into further detail just the variables I find the most interesting, not just to understand the food realm, but the entire actual global debate:

1- Biofuels are the next big thing in the energetic/environmental realm. To put it simply, biofuels are fuels coming from the treatment of some agricultural crops, such as corn or maize. Being some of the easiest-to-provide sources of renewable energy (they don’t require that much investment, since they normally are obtained from crops which otherwise would be thrown away), Biodiesel and Ethanol production has strikingly increased in the last few years (+80% from 2007 to 2010). The problem is that 98% of biofuels come from edible crops, thus competing with the use in the feed and food sectors. In other words, instead of harvesting for nourishment, agricultural industries exploit crops to produce energy. As a result, in 2010 almost 40% of the U.S. produced corn was used for energetic purposes. This not only might cause food shortages elsewhere (notably in the mono-commodity, poor developing countries), but it also induces an increase in cereal prices, making less and less affordable for poor people to procure the minimum amount of calories they need to survive. The solution would be to stop using food-competing crops to produce biofuels, and start advancing the exploitation of plants such as Jatropha and Cassava. However, this latter shift requires huge investments, and, as usual, agricultural multinationals are reluctant to spend money that way, while they can keep relying on the crops they already produce.

2- Financial Markets and Speculation. Changes in food prices can be related to shifts in both the food and non-food spot and futures commodity markets. In the first case, the price increases experienced immediately after the 2007 financial crisis can be explained by the fact that commodities soon became an attractive alternative to the tragically bleak investment prospects of stocks, shares and real estate. Therefore, investors started to buy massively, causing a sudden increase in food prices and, due to low level of food stocks, leaving space to a speculative bonanza which is now inflating a series of huge bubbles. In the non-food markets, the price boom of metals and oil, caused mainly by the Indian and Chinese infrastructural and housing requirements, induced food prices to follow suit. Massive uncertainties in the real estate sector made the rest, as well as the increasingly “westernised” eating habits of relevant parts of the developing countries population.

. Sometimes Finance literally kills… Source: FAO, 2013.

3- Climate Change. Extreme weather events and rising global temperatures contribute to reduce the total food stocks avilable in a number of ways. A hotter world means more droughts and rising sea levels, i.e. burnt or flooded fields. It also means that the amount of agricultural soil decreases, thus giving rise to the land grabbing phenomenon, to social struggles and food delocalization. Climate change encourages the formation of hurricanes and other violent storms, which periodically devastate entire regions, both in physical and economic terms. These countries then necessitate massive external aid just to (slowly) reprise their pre-catastrophe output level. What is worse: the frequency and severity of such events is rapidly increasing. This sharply pushes up the level of uncertainty both at a financial and merely human level, making the world food system weaker and weaker as the time passes.

Clearly, all the aforementioned variables are closely interrelated, and it is actually tough (if not impossible) to determine which one is the first to move and to influence the other. In any case, actual food threats play a pivotal role to present us the incredible level of complexity lying behind such phenomena, and should make us aware of the level of demagogy and self-interest present in some of the actual (inter)national economic policies. The global food system is highly inefficient, unequal and slow, and strong forces are playing against any viable reform. As a consequence, food wastes are, unfortunately, a daily, ubiquitous reality, and price mechanics keep harming millions of people. This World Bank video speaks for itself: